The Hong Kong Companies Court Revisited the Standard of “Serious Cross-Claim” Opposition to Winding-up Petitions

July 2022

Where debtor companies face with winding-up petitions by creditors, it is not uncommon for the debtor companies to oppose the petition by raising “genuine and serious cross-claims”

In one of our recent winding-up cases Re Silver Base International Development Co Ltd [2022] HKCFI 1793, the Companies Court of Hong Kong revisited the laws relating to creditors’ winding-up petitions based on dishonoured cheque and the standard of the “serious cross-claim” opposition to winding-up petitions.

In Re Silver Base, the Company owed the Petitioner, amongst other debts, a debt arising from a dishonoured cheque of approximately HK$37 million, which was drawn for the return of deposit by the Company to the Petitioner for the goods purchased from the Company. The Company ran an opposition based on “genuine and serious cross-claim” ground alleging that the Petitioner had breached certain agreement in relation to the sale of goods. The contract alleged by the Company was a separate contract from the sale of goods transaction leading to the Petition.

On petitions based on dishonoured cheque, the Court held that where the petition is based on the company’s failure to pay the amount under the cheque issued in favour of the petitioner, the fact that the company has a genuine or serious cross-claim for unliquidated damages is not a valid ground in opposition to the petition. In arriving at the above conclusion, the Court’s considered lines of authorities with the following reasoning:

A cheque, being a bill of exchange, is a separate contract from the underlying transaction. An unliquidated cross-claim under the underlying agreement is no defence to an action on the bill, and it is to be treated as the equivalent of cash generally.
Along the line of previous cases, the Hong Kong Companies Court consistently held that the failure on the part of the company to pay the amount due under a cheque was a sufficient ground to wind up the company; and a cross-claim for unliquidated damages does not constitute a valid ground in opposition to a winding up petition.

As an alternative reasoning, the Court opines that, in any event, the mere fact that the Company has a cross-claim for unliquidated damages against Petitioner arising out of separate contracts is not a valid ground for refusing to repay the deposit for the following reasons:

It would be unjust or inequitable to allow the petitioner to seek a winding up order against the company when the company has a serious cross-claim against the petitioner under the same contract. However, the same consideration does not apply, at any rate with the same force, when the cross-claim arose out of separate contract and has nothing to do with the debt in question.
In recent case of Re Hongkong Bai Yuan International Business Co., Ltd, [2022] HKCFI 960, the same Court held that even if the company has a serious cross-claim against the petitioner for breach of other contracts entered into between them, it does not provide a valid basis for the company not to pay the petitioning debt admittedly owed to the petitioner pursuant to the subject contracts until after determination of the company’s cross-claim. There are two reasons for this: (a) it would be tantamount to conferring a right on the company to retain the petitioner’s money as a security for the company’s cross-claim; and (b) the cross-claim arose out of different contracts and had nothing to do with the contract which gave rise to the debt.

Having rejected the Company’s grounds, the Court ordered the Company to pay the debts on petition within 14 days, failing which the Company would be wound up.

The Judgment in Re Silver Base has reiterated the Hong Kong Court’s approach towards winding-up petitions based on dishonoured cheques. More importantly, the alternative reasoning of the Court that “serious cross-claim” has to be on the same contract entails a higher standard expected by the Hong Kong Companies Court, so that it would be more difficult for the debtor companies to run a cross-claim opposition to resist winding-up petitions in the future.